Chandni
Chowk
to China
Entrepreneurship is in abundance in
India and China, but for SMEs to truly
succeed it essentially requires an enabling
environment equipped with efficient and
effective support systems.

W

hen Akshay Kumar resettled from
Chandni Chowk to China in the movie, he didn’t realize that he was also exhibiting Indian entrepreneurial skills, besides
the usual Bollywood masala. The Indian entrepreneur’s skills and commitment to succeed
have been well established in the form of legendary Indian institutions like Infosys, TATA,
Reliance, etc. Likewise, the Indian SMEs have
established themselves as engines of growth for
India by catering to the needs of international
markets. SMEs in China have also achieved rapid and sustainable growth over the past two decades. Such growth has increasingly contributed
to Chinese economic development, as a result of
which it has emerged as the manufacturing hub
of the world.
Status of SMEs in India & China
Globally there is no accepted definition of
SMEs. Different countries use different criterion. But most definitions are based on investment ceiling and employment. According to
a World Bank, there are more than 60 definitions of small and medium industries used in 75
countries. The most commonly used definitions
relate to either size of employment and/or quantum of capital investment/fixed assets. Historical past reveals that in most countries, including
India and China, SMEs start as proprietorships
and then transforms into small business units
and then grow to medium size units.
In India, the MSMEs (erstwhile SMEs) are
classified into the following: (i) enterprises engaged in the manufacture or production of goods

pertaining to any industry and (ii) enterprises
engaged in providing or rendering services. In
2004, the Government of India enacted the Micro Small & Medium Enterprises Act to make it
in tune with global practices and to provide opportunities for technological upgradation.
On the other side, China’s definition of SMEs
is broadly classified on the basis of employment,
revenue and investments. The Interim Categorizing Criteria on Small and Medium-sized Enterprises (SMEs) published in 2003 and based
on the SME Promotion Law of China sets the
guidelines for classifying SMEs. The definition
further classifies the enterprises on the basis of
activity, such as industrial sector, construction
sector, wholesale and retail trade sector, transportation and delivery services sector, besides
hotels and restaurant sectors. This explanation

covers 99 per cent of all Chinese enterprises,
contributing almost 60 per cent to the national
GDP and account for 82 per cent of employment opportunities.
The SMEs are an important part of both
the Indian and Chinese economies. The Fourth
Census revealed that registered MSMEs in
India in the manufacturing sector are of the
order of 9.47 lakhs, i.e. 61.96% of the overall
registered MSMEs. The number of service enterprises is 5.81 lakhs i.e. 38.04%. As far as unregistered MSME sector is concerned, manufacturing enterprises are of the order of 63.68 lakhs
i.e. 25.92% and the remaining 182.04 lakhs
(74.08%) belong to the service sector. Aggregating the registered and unregistered MSMEs, the
manufacturing enterprises are of the order of
28.03% while the remaining 71.97% belong to

Investment in plant and machinery
does not exceed Rs 25 Lakh
More than Rs 25 Lakh and less than Rs 5 Crore
More than Rs 5 Crore and less than Rs 10 Crore

Service Sector
Micro enterprises
Small enterprises
Medium enterprises

Investment in equipments
does not exceed Rs 10 Lakh
More than Rs 10 Lakh and less than Rs 2 Crore
More than Rs 2 Crore and less than Rs 5 Crore

PD Kaushik

Adviser - Legal
Affairs, ICEC

INFOCUS | INDIA-CHINA | SME | COVER STORY

Globally there is no
accepted definition
of SMEs. Different
countries use different criterion. But
most definitions are
based on investment
ceiling and employment. According
to a World Bank,
there are more than
60 definitions of
small and medium
industries used in 75
countries

the service sector. The number of women managed enterprises of the aggregate MSME sector
reached a figure of 21.30 lakhs against 10.63
lakhs as recorded in the 3rd census for the MSE
sector.
The performance of Chinese SMEs is far
more progressive. In 2007 a total of 4,459 large
companies accounted for 0.19 per cent of the
total number of enterprises registered in the
country; 4,2291 medium-sized businesses, or
1.78 per cent; and 2,327,969 small enterprises,
or 98 per cent, of the total. Overall, SMEs made
up for 99.7 per cent of the total number of companies operating in China at the time. Business
revenue of SMEs accounts for 60.42 per cent of
total earnings; small enterprises 6.54 trillion, or
23.70 per cent. The industrial income of SMEs
accounts for 66.28 per cent; 11.77 trillion of the
small enterprises are about 37.29 per cent. The
SMEs are increasingly playing an important part
role in employment generation. Large enterprises in China employ 20,877 thousand individuals or 18.11 per cent of the total employment;
medium enterprises 35,464, or 30.76 per cent;
small enterprises 58,947, or 51.13 per cent.

Commonality & Divergence
There are quite a few commonalities and divergences between Indian and Chinese SMEs.
At the macro-level, like the role and scope of
SMEs in their respective economies, government
recognition of the importance and vulnerability
of SMEs, etc, are quite a common phenomenon
for both countries. However, there are wide
number of issues that exhibit wide divergences.
A simple SWOT analysis for instance gives a fair
picture of commonalities and divergences existing between SMEs in India and China.
The SME contribution in terms of employment generation is the most common phenomenon for both economies. However, labour productivity is a major divergence. China exhibits
high labour productivity which is its strength as
compared to India; in fact the mind set and behaviour of labour is considered a serious weakness for Indian SMEs. Likewise, restricted access
to capital or lack of adequate credit facilities is
a common weakness for SMEs in India and
China.
The present WTO regime requires opening up of domestic market, lowering of tariffs,

300-2000 employees, annual revenue 30 million – 300 million
RMB, assets < 400 million RMB. All other industrial units with
lesser levels, classified as small enterprises.

Medium sized enterprises in
construction

600-3000 employees with annual revenue 30 to 300 million RMB
and assets 40 to 400 million RMB. All other units with lesser
values classifies as small enterprises.

Medium sized enterprises in
retail trade

100-500 employees or with annual revenue 10 to 150 million
RMB. All other units with lesser values classifies as small
enterprises.

Medium sized enterprises in
whole sale sector trade

100-200 employees or with annual revenue 30 to 300 million
RMB. All other units with lesser values classifies as small
enterprises.

Medium sized enterprises in
transport sector

500-3000 employees or with annual revenue 30 to 300 million
RMB. All other units with lesser values classifies as small
enterprises.

Medium sized enterprises in
delivery services sector

400 to 1000 employees or with annual revenue 30 to 300
million RMB. All other units with lesser values classifies as small
enterprises.

Medium sized enterprises
hotels & restaurants

400-800 employees or with annual revenue > 30 but less than 150
million RMB. All other units with lesser values classifies as small
enterprises.

|34| India-China Chronicle  November 2011

Parameters

III Census
(2001-02)

IV Census
(2006-07)*

1. Total No of enterprises (Lakhs)

1,05,00,000

2,61,00,000

2. No of manufacturing enterprises (Lakhs)

44,46,000 (57.74%)

73,15,000 (28.03%)

3. No of service enterprises (Lakhs)

60,75,000 (57.74%)

187,85,000 (71.97%)

4. Employment (Lakhs person)

2,49,33,000

5,97,29,000

5. Percentage of rural enterprises

55

54.38

removal of quantitative restrictions etc, which
means that SMEs will have to face tougher
competition in domestic and foreign markets.
Their goods have to meet tougher quality and
environmental standards. In view of their insufficient capitalisation, lack of access to capital,
knowhow and information as well as low skills
of work force, SME’s need assistance by way of
policy support and measures from government
and other organisations. The SMEs in both
countries in most of the cases do not have information on WTO regime and need extensive
sensitisation and nurturing.
Unlike India, which neither have quality
transport infrastructure nor good telecom connectivity, China has excellent telecom facilities
which help SMEs to get connected to international markets for expediting their business.
High quality transportation systems in China
comprising railways, waterways and roadways,
as well as efficient transporting equipment have
helped SMEs in transporting raw materials to
the enterprises as well as finished goods to respective destinations.
Indian and Chinese SMEs, on the whole,

have not been regarded as internationally competitive compared with those in the more technologically advanced economies. They may face
consumer ire if deficiencies in technology, capital, and skills for management are not improved
by forging closer cooperation with their counterparts in other economies.
At a breathtaking pace, China has firmly established its position as “the world’s factory.” It
enjoys such a huge manufacturing-cost advantage over other countries, not only on account
of low-cost labour, but the bigger factor is the
unique manufacturing spoke and hub called
“supply clusters.” These interconnected groups
of companies in close geographical proximity
to one another are a big source of lowering the
product cost. It has helped supply chains with
a big business advantage. Indian SMEs have experienced the “manufacturing spoke and hub
phenomenon” in only few cases only, like the
Tirupur cluster.
Indian SMEs are over dependent on the domestic market. Thus, lack of adequate efforts to
enter the export market. Entrepreneurs mostly
remain content with the domestic market as a

it is quite evident
that SMEs in both
countries confront
similar and
dissimilar types
of constraints
and opportunities.
However, SMEs in both
countries also exhibit
fairly rich experience
for collaboration
and cooperation to
benefit each other in
the long run

result of which their contribution to Indian exports is roughly 40%, but at the same time its
share of exports in the world market is less than
1%. On the other hand Chinese SMEs are over
dependent on the export market and their vulnerability was exposed recently during the global economic slowdown.
Thus, it is quite evident that SMEs in both
countries confront similar and dissimilar types
of constraints and opportunities. However,
SMEs in both countries also exhibit fairly rich
experience for collaboration and cooperation to
benefit each other in the long run.
Critical Issues
Despite playing a strategic role, the SME
sector in both countries suffers from various
problems. The SME sector is heterogeneous,
dispersed, and mostly unorganized, because of
which entrepreneurs and artisans/workers face
difficulties in accessing government schemes.
The recent global and domestic economic slowdown further exposed the weaknesses of SME
sector in both countries, more particularly the
exporting firms. The SMEs have a long way to
go and still lack the spark and lustre, and besides
the compelling need of identifying current challenges, it is required to find effective ways of
addressing these concerns, some independently
and some jointly. The various expedient issues
which can contribute to the competitive advantages of the sector are:
1. Policy Measures
2. Financial Support
3. Infrastructure
4. Capacity Building Initiatives
5. Other Issues

Other policy related issues may include establishing state of the art infrastructure, achieving
economies of scale and pro-SME procurement
policy as practiced in China. For instance, a set
percentage of government contract compulsorily go to SMEs. Similarly, much potential of
small firms to grow and nurture innovativeness is
shaped by the kind of infrastructure, both physical and economic, available and can be accessed
at reasonable costs. Unfortunately, the ramifications of infrastructural constraint faced by small
firms remain one of the most neglected areas of
enquiry. Moreover, the nature and implications
of such infrastructural absence or inadequacy
could be deeply varied as between small enterprises located in urban areas and those in rural
and semi-urban areas.
Likewise, policies regarding incentives for
SMEs investors, improved credit facilities, safety
nets against delayed payments, technology upgradation and capacity building, improved access to global markets, etc, are common for both
countries. For instance, SMEs generally suffer
from weak marketing. Most SMEs do not have

One the major strengths of SMEs in China
are the recognition of the importance of SMEs
by the government and the proactive policy for
establishing a pro-SME business environment.
However, the Chinese experience can be a lesson for policy makers in India, especially by addressing the rigidity of antiquated labour laws.
The problem of the outdated and archaic labour
laws makes it extremely difficult for entrepreneurs to start businesses and the ones already
started, in running them, and in case of failed
ventures almost impossible to shut it. The body
of legislation that shapes the industrial and labour environment in India is huge. There exists a
crisscrossing network of chaotic and often-contradictory laws, such as the Minimum Wages
Act, 1948; Trade Unions Act, 1926; Contract
Labour Act 1970; Weekly Holidays Act, 1942
and Beedi and Cigar Workers Act, 1966, Industrial Disputes Act, all of which need overhaul.
|36| India-China Chronicle ď&#x201A;§ November 2011

November 2011 ď&#x201A;§ India-China Chronicle |37|

INFOCUS | INDIA-CHINA | SME | COVER STORY

money to invest in market research and are unable to carry out design and technical improvements to keep up with market demands. Unable
to take up aggressive marketing, like big industries, they cannot invest in advertising and packaging and find markets despite good quality and
competent prices. This limits their ability to tap
markets and attract consumers.
The SME financing continues to be most important challenge for the creation, survival and
growth of SMEs in India and China, especially
the innovative ones. Shortage of working capital
is widely recognized as the biggest hurdle in the
growth of unorganized and organized SMEs.

The high cost of credit to SMEs also impacts
the competitiveness of their products. Securing bank credits, difficulties in documentation
for bank loans, and lack of collateral security are
bigger problems in majority of developing countries in Asia, including India and China.
Besides, SMEs face a number of challenges
which make it difficult for them to access international markets. Some of the major challenges
faced by SMEs in accessing global markets are:
• Market information
• Price competitiveness
• Cost of transport
• Availability of professional management skills

• Non-tariff barriers
• Domestic regulations (for services exports)
Among medium enterprises, cost of production is a major concern as they are able to gather
market information easily, compared to micro
and medium enterprises, which are not well
educated about global markets and sometimes
also lack the resources to gather market information.
It is true that SMEs in India and China suffer from lack of core technologies and intellectual property rights, poor cooperation between
large and small firms, limited access to finance,
lack of preferential policies, etc. However, experience of both countries can benefit each other
through cooperation and collaboration. Some
of the suggestions for both governments are:
a) Strengthen service quality among SMEs –
The respective governments must ensure
that initiatives funded with public money
are responsive to business demands, address
market failure, and provide value addition. It
must also see to it that the business support
network provides the targeted service to
businesses. Policymakers, both at the national and regional levels, must recognize that
the process of business growth has significant
policy implications for government services,
and determine ways to address these implications. Besides, from ensuring that employers
get high-quality training from colleges and
private institutions, such service providers
are often the key for many small firms.

|38|

b) Learn from each other’s experience – It is
imperative to learn from each other. For instance, interface between university and industry is a strength of SMEs in China, which
needs to be replicated in India to build
strong in-house technology development
and adaptation resource. Likewise, India has
considerable experience in energising rural
markets through institutions and bridging
rural-urban inequalities, perhaps China can
gain from the Indian experience.
c) Develop an Industrial Value Cluster (Hub
& Spoke) Plan to Enhance SME Competitiveness – Respective governments should
provide a policy framework that would serve
as a guide in the setting up of industrial clusters of small enterprises. Such a framework
should indicate how such clusters could be
formed, provide public funds for SME clusters, and set up promotional institutions that
will enhance technological collaboration
among SMEs, university and research institutions. The same framework should provide
business support, specifically for innovation;
cultivate markets; and foster human resources, among others. It should also build financing institutions for SMEs. Where SMEs are
concerned, the countermeasures to develop
SME clusters should be as follows:
• Improve small town infrastructure – Improved and low-cost infrastructure, such
as energy, transportation, communications, and Internet, is vital to SE clusterNovember 2011  India-China Chronicle |39|

INFOCUS | INDIA-CHINA | SME | COVER STORY

ing. Small town infrastructure development could be pursued gradually but
steadily while ensuring that SEs continue
to produce and develop while getting the
services that they need.
• Develop the industry that has competitive power – Small towns specializing in
production, trade, and tourism industry
should develop potentially competitive
industries.
• Undeveloped small towns should develop the industry using locally available
resources and potential regional markets.
This can be achieved through the industrial chain’s extension and new product
research and development, external scale
economy and healthy competition and
cooperation within the SME cluster.
d) Implement the macroeconomic regulation
and supply the local government service. The
government should draw up a preferential
policy for the development of SMEs, help
SMEs to choose appropriate region and
adjust their development direction. The

local government should help cultivate
entrepreneur spirit. The entrepreneurs of
small-medium sized enterprise cluster have
been regarded as important human resources
in the development of the enterprises. It is
necessary to create a suitable environment
for \entrepreneur development and supply
a preferential policy, complete law system,
fair market rules and so on. The point is
to build a culture of the local society to
promote competition and cooperation in
order to cultivate an innovative entrepreneur
efficiently.
e) The policy for SME development should
focus its priority on financing. Some of the
measures which could be taken up on priority basis are:
• Expand the list of SME financing tools to
include fiscal, banking, security market,
commercial credit, and private financing
sources
• Build policy bank of SME
• Develop a credit guarantee system
• Encourage utilization of foreign direct
investment and expand external markets
• Develop a second board market

• Provide a finance and taxation support
system for the promotion of SMEs’ technological innovation
f ) Complete the technological innovation
system for SMEs -- Extend fiscal and monetary support for technological innovation to SMEs that meet industry standards.
Strengthen the technological innovation
system with enterprises as the core hub, and
facilitate collaborative efforts among industry, university, and research institutions.
Government should promote the networking, interaction and collaboration among
key innovation players, foster technological
innovation alliances, establishing innovation
relay centers to make it easier for SMEs to
access applicable innovation resources, lower
their information, transaction, and organizational costs of innovation activities. The essential elements of a complete technological
innovation system rests on1) Innovative Technologies with Good
Market Potential
2) Entrepreneurial Team
3) Idea
4) Products
5) Innovation Fostering System
6) Funding System
7) Free and fair Market
Create innovation source – In particular,
reinforce the development of technology-based
SME community and lower the risks and costs
of innovation activities undertaken by technology-based SMEs.
Develop innovation clusters and reforesta-

tion – Guide the random innovation activities
of SMEs to follow the national development
strategy so as to build up innovation ecosystems
representing national competitiveness.
g) Encourage upgrading of the value chain,
including technology-based export promotion, that is, from OEM (Original Equipment Manufacturing) to ODM (Own Design and Manufacturing) & OBM (Own
Brand Manufacturing) etc.

The SME financing
continues to be most
important challenge
for the creation,
survival and growth
of SMEs in India and
China, especially
the innovative
ones. Shortage of
working capital is
widely recognized as
the biggest hurdle
in the growth of
unorganized and
organized SMEs.

Once again, coming back to the movie, today
entrepreneurship is nurtured from Chandni
Chowk to China. But it is also worth mentioning
that entrepreneurship alone cannot succeed,
it also requires an enabling environment and
other support systems. Though Akshay Kumar
in a Bollywood masala movie can do anything
and get away with anything. But in the movie
Chandni Chowk to China, he would not have
succeeded in his mission without collaborating
with the locals, or in other words the requisite
support systems. Likewise, entrepreneurship is
in abundance in India and China, but for SMEs
to truly succeed against all odds, it essentially
requires an enabling environment equipped
with efficient and effective support systems. 
November 2011  India-China Chronicle |41|